Chapter 8 Financial Reporting and Management Reporting Systems IS FUNCTIONS OF GLS
General ledger systems should:
collect transaction data promptly and accurately.
classify/code data and accounts.
validate collected transactions/ transactions/ maintain accounting controls (e.g., equal debits and credits). process transaction data. •
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post transactions to proper accounts update general ledger accounts and transaction transaction files record adjustments to accounts
store transaction data.
generate timely financial reports.
Relationship of GLS to Other Information Subsystems
GLS Database
General ledger master file
General ledger history file
journal vouchers of past past periods for audit trail
Responsibility center file
all journal vouchers of the current period
Journal voucher history history file
used for comparative financial support
Journal voucher file
principal FRS file based on chart of accounts accounts
financial data data by responsibility centers centers for MRS
Budget master file
budget data by responsibility centers for MRS
Journal Voucher Layout for a General Ledger Master File
GLS Reports
General ledger analysis:
Financial statements:
balance sheet income statement statement of cash flows
Managerial reports:
listing of transactions allocation of expenses to cost centers comparison of account balances from prior periods trial balances
analysis of sales analysis of cash analysis of receivables
Chart of accounts: coded listing of accounts
Potential Risks in the GL/FRS
Improperly prepared journal entries
Unposted journal entries
Debits not equal to credits c redits
Subsidiary not equal to G/L control accounts
Inappropriate Inappropriate access to the G/L
Poor audit trail
Lost or damaged data
Account balances that that are wrong because wrong because of unauthorized unauthorized or incorrect journal vouchers
GL/FRS Control Issues Transaction authorization - journal vouchers must be authorized by a manager at at the source dept Segregation of duties – G/L G/L clerks should not:
have recordkeeping responsibility responsibility for special journals or subsidiary ledgers
prepare journal vouchers
have custody of physical assets
Access controls:
Unauthorized Unauthorized access to G/L can result in errors, fraud, and misrepresentations in financial statements. Sarbanes-Oxley requires controls that limit database access to only authorized individuals.
Accounting records - trace source documents from inception to financial statements and vice versa
Independent verification
G/L dept. reconciles journal vouchers and summaries.
Two important operational operational reports used:
journal voucher listing – – details details of each journal voucher
posted to the G/L
general ledger change report report – the effects of journal – the
voucher postings on G/L accounts accounts
GL/FRS Using Database Technology
Advantages:
immediate update and reconciliation
timely, if not real-time, information i nformation
Removes separation of transaction authorization and processing
Detailed journal voucher listing and account activity reports are a compensating control
Centralized access to accounting records
Passwords and authorization tables as controls
HTML: HYPER TEXT MARKUP LANGUAGE
Format used to produce Web pages
defines the page layout, fonts, and graphic elements
used to lay out information for display in an appealing manner like one sees in magazines and newspapers using both text and graphics (including pictures) appeals to users
Hypertext links to other documents on the Web
Even more pertinent is HTML’s support for hypertext links in text and graphics g raphics that enable the reader to ‘jump’ to another document located anywhere on the World Wide Web.
XML: EXTENSIBLE MARKUP LANGUAGE
XML is a meta-language for f or describing markup languages. Extensible means that any markup language can be created
using XML.
includes the creation of markup languages capable of storing data in relational form, where tags (formatting commands) are mapped to data values can be used to model the data structure of an organization’s organization’s internal databas d atabasee
Comparison of HTML and XML Documents
XBRL: EXTENSIBLE BUSINESS REPORTING LANGUAGE
XBRL is an XML-based language for standardizing methods for preparing, publishing, and exchanging financial information, e.g., financial statements. XBRL taxonomies are classification schemes.
Advantages:
Business offer expanded e xpanded financial information to all interested parties virtually instantaneously. Companies that use XBRL database technology can further speed the process of reporting. Consumers import XBRL documents into internal databases and analysis tools to greatly facilitate their decision-making processes.
Implications for Accounting
Audit implication for XBRL
taxonomy creation: incorrect taxonomy
results in invalid mapping that may cause material misrepresentation misrepresentation of financial data d ata
validation of instance documents: documents: ensure
that appropriate taxonomy and tags have been applied
audit scope and timeframe: impact on
auditor responsibility as a consequence of real-time distribution of financial statements
MANAGEMENT REPORTING SYSTEMS
Produce financial and nonfinancial information needed by management management to “plan, evaluate, control”
Usually seen as discretionary reporting
Can argue that Sarbanes-Oxley requires MRS
MRS provide a formal means for monitoring the internal controls
Factors That Influence MRS Design
Management principles
Management function, level, and decision type
Problem structure
Types of management reports
Responsibility accounting
Behavioral considerations
Management Principles
Formalization of tasks:
structures the firm around the tasks performed rather than around individuals’ unique skills allows specification of the information needed to support the tasks
Responsibility and authority:
responsibility - obligation to achieve desired results
authority - power to make decisions decisions within within the
limits of that responsibility
delegated by managers to subordinates define the vertical reporting channels through which information flows
Span of control:
the number of subordinates directly under the manager’s control detailed reports for managers with narrow spans of control summarized summarized information for managers with broad spans of control
Narrow Span of Control
Wide Span of Control
Management by exception:
Managers should limit their attention to potential problem areas. Reports should focus on changes in key factors f actors that are symptomatic of potential problems.
Management Level and Decision Type
Strategic planning decisions:
firm’s goals and objectives
scope of business activities
organizational organizational structure
management philosophy
long-term, with broad scope and impact
non-recurring, with high degree of uncertainty
need highly summarized information
require external & internal information sources
Tactical planning decisions: decisions:
subordinate to strategic decisions
short term
specific objectives
recur often
fairly certain outcomes
limited impact on the firm
Management control decisions:
using resources as productively as possible in all functional areas evaluating the performance of subordinates against standards
Measuring performance is difficult because sound decisions with long-term benefits benefi ts may negatively impact the short- term bottom line. Operational control decisions:
deal with routine tasks
narrower focus, dependent on details
highly structured
short time frame
Three basic elements or steps: steps:
set attainable standards
evaluate performance
take corrective action
Classification of Decision Types by Decision Characteristics
Problem Structure
Reflects and affects how well decision makers understand and solve problems Elements of problem structure:
data
procedures
objectives
Management Reports
Report objectives - reports must have value or information content They should…
reduce the level of uncertainty associated with a problem facing the decision decision maker influence the behavior of the decision d ecision maker in a positive way
Report Attributes
Relevance – useful useful to decision making
Summarization – appropriate appropriate level of detail
Exception orientation – identify identify risks
Accuracy – free free of material errors Completeness – essential essential information Timeliness – in in time for decisions Conciseness – understandable understandable format
A ttributes ttributes of Useful Information I nformation According According to FASB’s Conceptual Framework
Types of Management Management Reports
Programmed Programmed reports:
scheduled reports – produced produced at specified intervals, e.g., weekly on-demand reports – triggered triggered by events, eve nts, e.g., inventory levels drop to a certain level
Ad hoc reports:
designed and created “as needed”
situations arise that require new information
Responsibility Accounting
Implies that every economic event that affects the organization organization is the responsibility of and can be traced to an individual manager Incorporates the fundamental principle that responsibility-area managers managers are accountable for items that they control
Setting Financial Goals: Budgeting
Budgeting helps management achieve financial f inancial objectives by setting measurable goals for each organizational organizational segment. Budget information flows downward and becomes increasingly detailed at each lower level. The performance information information flows upward as responsibility reports.
Responsibility Centers
Cost center – responsible for keeping costs within – responsible
budgetary limits
– responsible Profit center – responsible for both cost control and
revenue generation
Investment center – – has has general authority to make a wide
range of decisions affecting costs, revenue, and investments in assets
Behavioral considerations Behavioral Considerations: Goal Congruence
MRS and compensation schemes help to appropriately appropriately assign authority and responsibility. If compensation measures are not carefully designed, managers may engage in actions not optimal for the organization.
Short-term v. long-term measures
Behavioral Considerations: Information Overload
Occurs when managers receive more information than they can assimilate. Can cause managers to disregard di sregard formal information and rely on informa i nformall — probably inferior — cues cues when — probably making decisions.
Behavioral Considerations: Performance Measures
Appropriate performance performance measures
Stimulate behavior consistent with firm objectives. Managers consider all relevant aspects, not just one.
Example of inappropriate measures:
price variance – can can affect the quality of the items purchased quotas – can can affect quality control, material usage efficiency, labor relations, plant maintenance profit measures – can can affect plant investment, employee training, inventory reserve levels, customer satisfaction